Klaveness Combination Carriers ASA

OSE:KCC

Earnings Call Transcript 2022-Q2

[Engebret Dahm, executive]

Good morning, everyone, and welcome to the second quarter result presentation of KCC. I'm Engebret Dahm, the CEO of the company. And together with me, I have our CFO, Liv Dyrnes. [Operator Instructions]

So we are owners of combination carriers that are ships that are both product tankers and dry bulk vessels. In dry bulk mode, they compete against standard Panamax and Kamsarmax vessels. In tanker mode, they compete against LR1 and MR product tankers. There are two types. We have our CABUs that in wet mode, transport mostly caustic soda. And we have our new CLEANBUs, the last delivered in June last year, transporting a large variety of tanker cargoes. Both types can transport all type of dry bulk commodities.

We are -- our business is to transport tanker cargoes into regions that are big exporters of dry bulk commodities. This is mainly to Australia and South America. And the East Coast Australia trade is a good example, where our ships bring caustic soda and clean petroleum products to Australia and return with various type of dry bulk commodities northbound to Asia. On these [indiscernible], we have very limited ballast and the ships accounting for around 10% of the capacity.

The competing ships to Panamax, dry bulk and product tankers are sailing long distances without any cargo on board due to the underlying fleet growth. So our ships transport far more cargo than the standard ships, and that has three implications. Firstly, we have lower fuel consumption transported, meaning we have a much lower carbon footprint than our competitors. Secondly, we have more paying days, meaning we have higher earnings. And thirdly, we have a positive link to fuel prices. While standard ships get compensated for higher fuel prices through the freight mechanism, we get over compensated through our efficiency.

So looking at the second quarter, this is the first quarter since 2008, where we had all the three markets deciding the earnings of our company is strong. The dry bulk market strengthened in the end of the first quarter and continued, and we did strength through the second quarter. The product tanker market boomed through the spring and capped high during the summer. The fuel markets reached the highest -- fuel price for shipping. So the backdrop was very strong.

Looking at the results of the company, we have record-high results in the second quarter with time charter earnings average of the fleet of $30,235 per day, which is slightly above the guiding range we gave back in May. The performance of our fleet outperformed standard tankers and dry bulk vessels with a factor of 1.1.

Based on the strong performance of both the CABUs and the CLEANBUs, the EBITDA is increased by around 50% to $25.6 million, which is very strong, the highest ever. Also, based on the strong results and also confidence in the prospects for the next quarters, the Board has decided to increase dividends from $0.18 to $0.23 per share. This equates to roughly 13% running yield based on this week's share price for the company.

Our biggest competitive advantage in KCC is our carbon efficiency, meaning that we can transport the same cargoes as some competitors with a 30% to 40% lower carbon footprint. This competitive advantage, we believe, would become more and more important in the years to come when the shipping industry needs to decarbonize. And that's why we have set very ambitious targets to improve this competitive advantage by cutting emissions, increasing efficiency throughout our business.

We have started to roll out an energy efficiency program on all vessels that go through dry docking. And you have to see that we have very positive results for the initiatives that we have made. I wanted to give you an example of the docking of the CABU vessel Baffin made in December last year, where we installed a Mewis Duct as you see on the picture as well as applied silicone antifouling and a new system for reducing the friction of the [indiscernible] of the ships.

As the curve shows, we just -- which is the relative performance to the newbuilding baseline, we see a large improvement in the fuel consumption of the ships after docking compared to before the docking. This is quite normal for ships going through dry dock. In a normal case, you bring the performance, best case back to how it was when the ship was delivered as new. What is interesting to see on the Baffin docking is that we've been able through our initiatives to improve the performance of Baffin down to 10% better than how the ship was when it was delivered as new.

We have to see that this initiative is also reflected in our KPI when it comes to the average carbon, CO2 emission per vessel. We've be able to reduce CO2 per ship from 18,900 in 2021 to average 17,500 in the first half of this year. This is well in line with the target for 2022, we set back in 2020 and with implying a 15% reduction in CO2 emission from 2018 until the end of 2022.

When it comes to the progress on carbon intensity, which measures the efficiency of our transportation work, we have not shown the same progress. We have over the recent half year decreased EEOI from 7.5 to 7.4, which is good. But we see that we are far away from the target we set back in 2020 of an EEOI of 5.8. We have a number of initiatives going, and we expect to improve this over the coming quarters. But it will take -- we need longer time to reach the targets we set back in 2020. But while we are a bit disappointed over the progress on EEOI, please remember that our performance is still around 30% better than the benchmark vessels, standard assets doing the same transportation work as ours in our trade.

Our business and earnings is derived from three markets, the dry bulk, the product tanker market and the fuel markets, markets that have a low correlation. And hence, we have a positive classification effect of being in more markets and hence a risk-reducing effect. This can be seen from the development in the market since early 2020, starting off with a dry bulk market where we saw that the dry bulk market recovered substantially after the weak period during the early phase of the pandemic, reaching close to $40,000 per day in the autumn of 2021. The market head back during the winter, but went up again to run $30,000 during this spring. But over the summer, the dry bulk market has weakened substantially, and we noted down yesterday at $12,800 per day for Kamsarmax.

We see just the opposite development for the product tankers, so we have the LR1 tanker spot rates, falling back from peaking levels during the early phase of the pandemic, maintaining very low levels around $10,000 per day earnings up to the Russian invasion of Ukraine. And since then, the recovery brought the earnings up to close -- around $50,000 in May, and has been keeping up with very high levels ever since, around $40,000 per day.

Fuel prices have increased steadily since the early phase of the pandemic, peaking in the early June at $1,100 per ton in Singapore, which is the highest ever fuel price for shipping. It has -- as the oil prices has decreased over the recent months, also fuel prices have decreased, but it's still at historically high level at close to $800 per ton.

So to summarize today after the fall in the dry market, 2 of our 3 markets remained strong, which is more than enough to drive the earnings of our company.

Looking at the dry bulk market, you see this graph, which measures the deadweight duration -- the demand has deadweight duration. We see a positive development with a 5% -- 5.4% increase in demand in the first 7 months of the year. This is a lagging indicator. So the recent macroeconomic headway and the weakening of the Chinese economy will likely be shown in these figures over the next months, which already is reflected in the market as we see in the weakening dry bulk market.

The main reason for the weakening in dry market is the fall in port congestion, where the percentage of the fleet in port has decreased from around 44% during the spring, down during recent months between 39% and 40%, effectively increasing supply in the dry market by 4% to 5% overnight.

So looking ahead now to different opinions of how the dry market will develop, some believe that we have to wait with a recovery in the dry market until the effects of Chinese stimulus of help through the economy, which may not -- may take a quarter or 2. When others I'm optimistic, meaning that the increasing distances caused by the situation in Ukraine will lead to increase the ton-mile demand. And due to the tight situation in the market, could easily recover the market over the coming quarters. We tend to be optimistic, and that's also based on the fact that we have record low order book, implying a very low fleet growth over the coming quarters.

The fundamentals in the tanker market is more solid. Looking at on the graph, we see that both the oil demand in blue and the oil production has increased steadily over the recent quarters and has now more or less back to the level before the pandemic. We also see that the oil stocks are still at record low levels, although increased a little bit for recent months due to release of -- partly release of the strategic reserves.

Another factor making the tanker market resilient is the fact that the order book is record low that has been some contracting lately. 25.4% of the fleet on order is record low. So based on these fundamentals, and based on expectations of a strong increase in sailing distances and ton-mile development, we are very confident of a positive development in the product tanker market.

The graph here shows the latest projections of Clarksons, showing an estimate 10% increase in ton-mile demand this year and another 6% increase in ton-mile demand in 2023. This is driven by three factors, partly in the COVID-19 reopening. And as we know it, this -- the easing of travel restrictions and opening of the societies in the Pacific, in Japan, China, Korea is still to come. We see a continued dislocation refineries with increasing capacity coming in both Middle East and Asia and building down of refinery capacity in the Western world, which will -- and the third factor, which likely will have the most effect over next quarters is the ban on Russian seaborne oil imports in EU, starting up with oil products in December and crude in February, where the short-haul imports from Russia, from the Baltic, will be replaced with longer-haul import from U.S., Middle East and Asia.

Looking at how we are positioned at the moment. Most of our capacity for the third quarter is already booked, measured as fixed rate coverage. We have 77% of the third quarter capacity in the tanker market booked, while around 100% of the dry bulk capacity is booked, including the FFAs we have sold.

For the fourth quarter, we have in the tanker market around 40% of the capacity booked on fixed rate contracts, which are the contracts we have for our CABUs in the caustic soda trade to Australia. For the dry bulk capacity, we have mainly have derivatives, which are FFAs and options that currently are well in the [ money ] which are covering the exposure.

Looking ahead for 2023, we have no fixed rate coverage. We have index-linked contracts. And we are in the process of negotiating an extension of our contracts to Australia with caustic soda for our CABUs, which we are optimistic we can renew with stable or increasing cargo volumes for 2023.

Having combination tariffs being both tankers and dry bulk vessels, we have been able to get the best out of the tanker and dry bulk markets over time and delivering earnings well over the spot earnings of competing dry bulk and product tankers. So in this graph, we normally like to show, shows the KCC average earnings in the blue columns, the dry bulk spot earnings in gray and the product tanker earnings in black. Over time, we have managed to outperform these markets with a factor of 1.5.

The CABUs had a fantastic quarter in the second quarter, of course, due to the strong market, but also due to improving operational efficiency of the fleet. And this happens despite continued problems in with COVID restrictions in China, leading to slower port turnaround times and congestion.

We have relocated two CABUs from Atlantic to Pacific in the first quarter and part of the second quarter. And we now have all the eight CABUs in trade -- an efficient combination of trade tuned from Australia. And you can see that on the graph to the left, where we see the mix between dry bulk and tanker trading for the CABUs are now back to around 50-50. We also see the improvements in through the percentage of the days in combination trading, no more than 80%. And we also see a significant reduction in the ballast percentage of it.

The earnings is spectacular, the highest since 2012, and it's very costly impacted by the strong dry bulk market in the quarter. And furthermore, the record high fuel prices making the value of our efficiency higher has also impacted mainly through the dry bulk spot fixtures we have made in the quarter. We also had positive effect on the product tanker market, but mainly through one of our contracts being index-linked, accounting for around 30% of the tanker capacity of the CABUs. The remaining part is fixed rate contracts concluded last year.

So very happy with the results of $30,876 per day, which is an increase of $6,600 per day since the first quarter, and the performance of CABUs outperformed both the tankers and dry bulk vessels with a factor of 1.2. Year-to-date, earnings for the CABUs are now at $27,620, again, an outperformance of the tankers by 1.6 and bulk by 1.2.

We are pleased to report when it comes to the CLEANBU, we have had a strong progress in the business development of these new ships. And it has definitely helped that with a stronger tanker market, but also the more extensive track record we have built over time has been to help. So this graph just shows that we've been able to nearly double the number of customers and we have charterers in -- of our CLEANBUs at this year compared to last year. And the graph just compares to the average LR1 spot earnings.

We also had a closer breakthrough in trades -- long-haul trades, combination trades, into the Americas, where we have started new trade from India, Middle East to East Coast, U.S. And we also increased substantially our share of our products moving from Middle East, India into South America helped especially with a number of new industrial customers in South America. So in the second quarter and to date in the third quarter, we employed 5 to 6 of our CLEANBUs in this well-paying and very efficient trade.

The efficiency of our CLEANBUs is also measured through our main KPIs. We see, we have a 50-50 split between dry bulk and tanker trading in the quarter. We have a very high share of the capacity in combination trading. And also despite the ballast percentage increasing, which is due to fixture of two tanker spot voyages, the average ballast percentage during the first half of the year, or 12%, is very strong.

Earnings of the CLEANBUs of $29,558 is very strong, an increase of more than $10,000 per day compared to the first quarter. It, of course, has helped mainly by the strong dry market and the positive effect of higher fuel prices.

The positive effect from the booming product tanker markets will mainly be seen in the third quarter. This is partly due to the fact that the first part of the quarter, the vessels traded more in dry trades and partly due to one vessel stuck in congestion with a freight rate lower than the spot market at the time. But as we come back to the outlook for the CLEANBUs for the third quarter is very strong.

Year to date, the earnings are $24,053 per day, which is 1.1x the product tanker -- LR1 product tanker earnings and matching the Kamsarmax earnings during the period.

Liv, would you take over?

[Liv Dyrnes, executive]

Thank you, Engebret. I will start with EBITDA, as I usually do. As you can see here, EBITDA for Q2 was $26.6 million. That's an increase of close to 50% from last quarter. As you probably already have noticed, the main driver behind this change is the higher TCE earnings. In total, this amounts to $11.5 million, as you can see here in the green columns.

Operating expenses increased by $2 million from Q1 to Q2. So if we have a closer look at operating expenses per day, the CABUs to the left and the CLEANBUs to the right, you will see, and I think I also mentioned that in the last quarterly presentation, that OpEx per day is quite volatile from quarter-to-quarter. The increase of $1,300 to $1,400 per day from Q1 to Q2 for both segments is mainly due to timing of crew changes. We had substantially more crew changes in Q2 compared to Q1. We also see some effects of timing of purchasing and maintenance.

However, if we have a look at the average for the first half of 2022, $7,700 for the CABU vessels and close to $8,500 for the CLEANBU vessels, you will see that, that is quite in line with the average for 2021. However, we do expect this to be somewhat higher in the second half compared to first half as that is the usual trend we see in OpEx through the year.

If we then have a look at the items below EBITDA for Q2, you will see that the depreciation is quite stable. Net financial items, slightly down. This is impacted by a modification gain related to some changes in one of the mortgage debt facilities. This is a positive one-off of $1.2 million for Q2, partly offset by somewhat higher interest costs as well as a negative FX effect in Q2.

Profit for the quarter, $16.2 million, an increase of approximately 120% from Q1. Return on capital employed, 12.7% for Q2, up from 7% last quarter. And based on the strong financials and the outlook, as Engebret mentioned, dividends $0.23 per share for Q2.

As you will see on the bottom here, we had off-hire days of 102 in Q2, an increase of 60 days, all related to dry docking. The remaining 40 days in Q2, and we have approximately 20 days COVID-related.

Let's have a look at first half as well. EBITDA, $44.4 million, up approximately 80% from the same period last year. One of the main drivers here as well is increased TCE earnings amounting to $11.7 million for the CABU fleet and $6.1 million for the CLEANBU fleet.

We, as well, took delivery of three vessels during the first half last year. In total, this amounts to $6.5 million and positive change between these two periods, while we sold one CABU vessel in December last year. When comparing first half last year and this year, a negative effect of $2.1 million. We also saw somewhat higher expenses or costs comparing these two periods.

Over to the table to the right, you will see the depreciation is quite stable but somewhat impacted by the fleet change. Net financial items, down $0.4 million. That's also explained by the same items as for Q2 this year with a large one-off of $1.2 million positive. Profit for the first half, $23.5 million, up from $1.4 million last year. Dividends per share, $0.41 compared to $0.075 in first half of 2021 and return on capital employed close to 10% for first half.

Over to cash flow. Cash increased by close to $10 million in the quarter. In addition to the strong EBITDA, we saw a positive change in working capital of $7 million. Dry docking costs of $4.5 million and debt service of around $9 million. We, as well, paid dividends in May of $9.4 million and hence, the cash position at the end of Q2, $67.2 million.

Available liquidity, approximately $116 million. We are of approximately $20 million related to overdraft facility, short term, mainly used for working capital changes. Approximately $20 million, as well, allocated to energy efficiency investments. As you know, we raised equity last year for these investments.

We, as well, have a healthy balance sheet. Equity ratio at end of Q2, 43.6% and an increase of approximately 1.6 percentage points from the end of Q1.

As mentioned, we did some modifications to one of the mortgage debt facilities. It was extended by 1 year, up in March 2027. And we renegotiated the margin on LIBOR terms, the decrease is approximately 75 basis points. This was as well transferred to Term SOFR from LIBOR. The first major refinancing is coming up in December 2023.

That's it regarding P&L and balance sheet. Engebret, over to you.

[Engebret Dahm, executive]

Thank you, Liv. Just to summarize again, despite increasing macroeconomic risks, we have high expectations for the results of KCC and the performance of KCC over the coming quarters. We have, as you see from the graph, both two of our markets, both fuel prices and the tanker market record high while the dry bulk market has weakened somewhat, but don't count out the dry market. The good possibility that, that could jump back over the coming quarters. While the dry market backdrop is still strong, you should expect that we will have continued volatility in these markets, which will impact our earnings, making the quarter results going a bit up and down.

Looking ahead, we have progressed well during 2022 with increasing the market share of the caustic soda shipments to Australia. And we are optimistic that we can increase further in 2023. And based on the strong tanker markets, we are also optimistic that we can achieve a solid increase in contract freight rates in caustic soda to Australia in 2023, which will support the CABU earnings next year.

As mentioned, we are very happy with the progress we have made on the CLEANBUs, where we have expanded the combination trading and the number of customers that create solid base for the CLEANBUs and more stability on the trading, and both and the effects through trading efficiency and earnings and pricing.

And now the matter for the CLEANBU you should remember is that the flexibility of the ships make it possible for us to adjust the mix of dry bulk and tanker trading dependent on the relative strength of the market. I'll give you one example. We have the Baleen fixed from India to New York here this summer. And after that, we fixed with CPP [indiscernible] from U.S. Gulf to Brazil instead of [indiscernible] facing the dry bulk long-haul cargoes out of U.S. Gulf with grains to the Far East to Middle East.

After we completed the voyage in South America, we have two options. Normally, we would take sugar or grains into Middle East to the Far East. As it looks low, we may rather take a -- cargo from South America into India. So this shows the flexibility we have and which we will actively use over the coming quarters. So based on the high percentage of the capacity fixed for the third quarter, we have confidence that the third quarter will be another record-breaking quarter for KCC.

Looking at the CABUs, we will guide on an earnings of $25,500 to $26,500 per day. The earnings is impacted by the weak dry bulk markets. The positive effects of the product tanker markets will not be enough to offset the dry bulk market effect. And as you know, the contracts we have on the CABUs, will expire at the end of the year and positive effects from market will only be reflected in 2023.

We are very happy to see the strong performance we expect for the CLEANBUs in the third quarter. We guide of an earnings of between $44,000 and $46,000 per day, which is an increase of more than close to $20,000 per day. And we have that which gives an average earnings of $35,300 to $36,900 as a guiding for the total fleet for the third quarter.

Before we end, we want to remind you that our model or business model is, in our opinion, more future-proof and profitable than the standard tanker and dry bulk markets and also more resilient to all risks that we are -- we may face with the macroeconomic uncertainty we have in [indiscernible]. So we have a model, providing the lowest carbon emission shipping service in the industry. And this, we believe, will become more and more important going forward. Due to the diversification effect of different markets, we have lower earnings volatility. And due to efficiency, we have been able to earn substantially more than the standard markets over time.

And please do not forget to tune in on our webcast. There would be new episodes coming up over the coming weeks where we -- and you can find it on podcast and other places you find, Spotify, where you normally find such podcasts.

Thank you. That ends the presentation, and we are ready for questions.

[Unknown Attendee]

Yes, we have a couple of questions here. How should we think about the remaining open exposure for Q3, given the steep decline in the dry bulk spot rates? And to what extent are you capable to switch more capacity into the product tanker market in Q4?

[Engebret Dahm, executive]

I think we -- the weakening dry market is already reflected in our estimations and we're guiding for the quarter.

For the CABUs, we have rather limited possibilities to increase tanker exposure. But as I mentioned, in an example, we continue to try to adapt the tanker exposure and increase in tanker exposure of the CLEANBUs without compromising the trading efficiency of the fleet.

[Unknown Attendee]

How much do you expect the freight rate for caustic soda contracts to increase?

[Engebret Dahm, executive]

I think it's too early. I think it's -- you can just imagine that last year, when we negotiated the contracts, the spot market was below $10,000 per day per [indiscernible] -- and the time charter rate for the next 12 months was around $12,000 per day. Today, the spot market is closer to $40,000 and the time charter rates for [indiscernible] -- are also close to $25,000 per day. So I think you can just imagine that assuming that the freight tanker market continues, I think we are going for a solid increase. I can't tell you how much.

[Unknown Attendee]

With the increase in number of customers in trade so far in 2022, what do you expect in this area going forward?

[Engebret Dahm, executive]

I think we have got a very good momentum with respect to increasing customers and expanding trade. It took us some time to convince the market that our ships were as safe, but much more efficient and with a lower carbon footprint than the standard vessels.

So I do believe that this will continue. We are -- we have advanced well as mentioned on the Atlantic trades, and we do expect and hope that we can also advance further in our trades to Australia over the coming quarters.

[Unknown Attendee]

Yes. That seems to be it.

[Engebret Dahm, executive]

Okay. Thank you all for joining.